Office vacancies increase, rental rates could drop amid low oil

 

By Roxanna Asgarian

Making the rounds at the major brokerages and commercial real estate associations for their annual outlook events earlier this year, the word on every high-profile broker and analyst’s tongue was “pause.”

“We can all take a pause and breathe,” John Holland, executive managing director of CBRE Group Inc. said in an HBJ interview in January.

On a tour of the Energy Corridor, David Hightower, chief development officer for Wolff Cos. and head of the Energy Corridor Improvement District, said of the submarket, “We’ll start seeing a pause, but it will pick up quickly once energy business starts to gin up.”

The industry came off a stellar year in 2014, with near record-breaking absorption, which has provided a buffer for the market. But what folks have called a pause might turn into a slide if oil continues to sit where it is.

With high-profile tenants like U.K.-based BP PLC (NYSE: BP), Oslo-based Statoil and Sydney-based WorleyParsons putting hundreds of thousands of square feet of sublease space back on the market, 1.2 million square feet of sublease space came online in January alone. There’s currently 5.2 million square feet of sublease space on the market, or 2.6 percent of all available space.

Trevor Hightower, managing director of Houston’s CBRE office, said when sublease space hits 3 percent of available space in the market, downward pressure on rental rates is likely.

“With additional sublease space expected to hit the market soon, we could see 3 percent in short order,” Hightower added.

Another factor that will hit the office market is the more than 17 million square feet of office space currently under construction, 10.9 million square feet of it preleased. More than 6 percent is vacant, which will add nearly 2 percent onto the overall vacancy rate, according to CBRE. Even of the preleased space, 8.3 million square feet of it will be tenants moving out of their current space in Houston, adding what Hightower calls “shadow space” to the market.

And major M&A transactions like the merger of Houston-based Halliburton and Baker Hughes will surely affect vacancy rates, as the two companies occupy 2 million square feet of office space and 2.7 million square feet of industrial space in the market, according to CBRE.

Overall, vacancy rates could reach 15 percent, CBRE predicts.

“There’s going to be short-term pain that is prolonged to the extent that oil prices remain below a certain threshold,” Hightower said.

By the numbers

11% Amount of BP’s total office space at its Energy Corridor campus — 240,000 square feet — in two buildings the energy giant is looking to sublease. The U.K.-based company is planning hundreds of job cuts and structural changes worldwide.

6.1 million Square feet of new construction vacancy delivering in 2015 and 2016

1.9% The amount of vacancy this space will add to the market

15% Projected vacancy by the time all current construction delivers

Source: CBRE

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